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Macroeconomics 1st Edition Glenn Hubbard, Anthony Patrick O'Brien, Matthew P Rafferty - Solutions
How is labor productivity related to the standard of living?
Use the equation that relates the standard of living to labor productivity to describe the probable effect on the standard of living of each of the following: a. There is a baby boom, causing the population to increase. b. The length of the average workweek decreases. c. The capital stock rises.
In 2000, France shortened the legal workweek to 35 hours (from the previous workweek of 39 hours). Hours worked in excess of 35 would require payment of overtime.a. All other things being equal, how would you expect this measure to change the standard of living?b. One reason for this change in work
Consider the following statement: “Leisure time is not counted in real GDP because it is not a productive activity. So, it should not be part of the measurement of the standard of living, either.” Do you agree with this statement? Briefly explain.
Measures of income distribution from the CIA World Factbook show that the most unequal income distribution in the world in 2009 was in Namibia. Namibia is also a relatively poor country, with per capita GDP of $6,900 in 2010. Brazil is considered to be one of the fastest growing of the newly
Economist Robert Frank and others suggest that some goods are “positional.” In other words, their value comes largely from their relative desirability, such as the best house in the neighborhood, the newest car, the largest yacht. Frank contends that such goods result in a wasteful “arms
Why does the marginal product of capital decrease as more capital is added?
Some countries experiencing low birthrates are offering women incentives to have children, such as income subsidies and other benefits. Does the analysis in this section suggest that a decline in the birthrate is bad for the standard of living? Why do governments worry about population declines?
Suppose that the per hour worked form of the production function for an economy is given by the depreciation rate is 10%, the investment rate is 20%, and the growth rate of labor hours is 2%.a. Find the steady-state capital-labor ratio for this economy.b. Find the steady-state real GDP per hour
Suppose that the economy described in problem 2.11 is at the steady-state capital-labor ratio. A change in preferences causes the investment rate to rise to 25%.a. Describe the forces that will move the economy to the new steady state.b. Find the new steady-state capital–labor ratio and level of
It is often said that economies with larger investment rates will grow both faster and for a longer time. Imagine two economies both of which have a capital–labor ratio that is less than the steady state ratio. Assume that these economies have identical production functions, rates of growth of
The former Soviet Union, a planned economy, was able to maintain consistently high rates of investment for decades. Use the Solow growth model to explain the limitations of growth through an expansion of the capital stock.
Explain the concepts of depreciation and dilution.
Use the bathtub analogy to explain the steady state capital-labor ratio.
Following World War II, many countries, including the United States, experienced a baby boom— an increase in the growth rate of the population.a. Use the Solow model to demonstrate the effect of a baby boom on the steady-state capital–labor ratio.b. Explain the effect of the baby boom on real
Following the 2007–2009 financial crisis, interest rates on many investments declined to historically low levels.a. Assume that savers respond to low interest rates by reducing their saving rate. Use the Solow model to demonstrate the effect of a reduction in the saving rate on the steady-state
Consider the following statement: “Without a well-functioning financial system, it is not possible for an economy to reach its full potential for economic growth.”a. Briefly explain whether you agree with this statement.b. How does a well-functioning financial system help to explain why so many
Most countries that have experienced high rates of economic growth have economies that can roughly be characterized as free market. China’s economy is one of the most rapidly growing in the world, yet parts of that economy are state controlled.a. How did the 1978 economic reforms change the
What factors cause total factor productivity to change?
What role does geography play in economic growth?
Consider the economy described in Problem 2.11. Suppose that total factor productivity increases to 15.a. Find the new levels of the steady-state capital–labor ratios and real GDP per hour worked.b. Would a similar increase in the growth rate of labor hours have the same effect? Explain.
One comprehensive study of contributions to growth in recent years found that the majority of growth in China over the 2005–2007 period was due to increases in the capital stock, although there was also a significant amount of growth due to increases in total factor productivity. In contrast,
Investment in research and development is strongly linked to growth in total factor productivity. Governments usually support research and development activities because firms will tend to under invest in such projects. Why would firms tend to under invest, and why is it beneficial for government
What is a balanced growth path?
Suppose that an economy is growing at its steady state rate of 4% per year when a natural disaster destroys one-quarter of its capital stock, leaving all other factors of production unchanged. a. What will be the immediate effect on the capital–labor ratio and real GDP per hour worked? b. After
Prior to 2009, Zimbabwe experienced a decade of negative economic growth. Although there were many causes of these problems, two prominent causes were misguided land reforms that removed considerable agricultural land from production and hyperinflation that destroyed the financial system.a. Use
On average, growth rates for high-income economies are much lower than growth rates for low-income economies. How does the Solow model explain this?
The average growth rate in the United States is about 2.9%, and real GDP per capita is about $47,400. The average growth rate in China is 8.5%, and real GDP per capita is about $7,400. The average growth rate in Kenya is less than 2%, and real GDP per capita is about $1,600. Is it possible that the
The following graph shows an economy that is at the steady-state capital€“labor ratio. Suppose that an increase in the rate at which capital depreciates causes the break-even investment line to become steeper, as shown.a. How will the steady-state capital€“labor ratio and real GDP per hour
Is the world on a balanced growth path? What evidence do we have?
Are all countries on a balanced growth path? What evidence do we have?
How did Germany diverge from a balanced growth path? How did it return?
Japan diverged from a balanced growth path and apparently returned to a higher growth path. What changed?
Consider the economy described in problems 2.11. Suppose that annual growth in total factor productivity is 2%. a. What is the steady-state growth rate of real GDP? b. What is the steady-state growth rate of the capital–labor ratio?
Suppose that all economies have the following production function Y = K1/2L1/2: A developed country has a saving rate of 28% and a population growth rate of 1% per year. A less developed country has a saving rate of 10% and a population growth rate of 4% per year. In both countries, total factor
What is a store of value? What types of assets act as a store of value?
After the French Revolution in 1789, France experienced a hyperinflation similar to Zimbabwe’s (although much smaller in magnitude). At one point, the French currency was worth so little that people used it for fuel rather than spending it. a. What function(s) of money did the French currency
What is a medium of exchange? Why must money act as a medium of exchange?
What is a standard of deferred payment, and why is it important?
List the components of M1 and M2.
Each of the following has been used as money at some time in the past. Comment on how well each fulfills the four functions of money and why it might be used as money.a. Gold or silverb. Cigarettesc. Saltd. Native American beads
People living in Yap, an island group in the Pacific, at one time used as money large stone disks known as Rai. These disks can be up to 12 feet in diameter and were made of a stone that is not native to the islands, so they had to be transported by canoe with great difficulty and risk. The stones
Briefly explain why the monetary base is often called “high-powered money.”
Suppose that the required reserve ratio is 8%, banks hold 5% of deposits as excess reserves, and the currency-to-deposit ratio is 2.a. What is the value of the money multiplier?b. If the Fed conducts open market operations and buys bonds from banks, what will happen to the money supply?c. How would
What is the formula for the money multiplier?
How does the Fed control the monetary base?
Why does the Fed have greater control over the monetary base than over the money supply?
In April 2011, the money supply, as measured by M1, was approximately $1,917 billion. The monetary base was approximately $2,494 billion.a. What was the value of the money multiplier?b. Why is the value of the money multiplier typically greater than 1? What is the key reason that it was less than 1
As of early 2011, banks continued to hold large amounts of excess reserves, leading to concern that potential increases in lending activity could increase the money supply and the inflation rate.a. Use the money multiplier to explain how a reduction in excess reserves could lead to an increase in
Consider the following statement: “The central bank is the only entity that can print money. Therefore, the central bank has complete control over the money supply.” Do you agree with this statement? Explain.
What is the difference between the quantity equation and the quantity theory of money?
According to the quantity theory, what is the relationship between the rate of growth of the money supply and inflation?
The average annual growth rate of real GDP for the United States is about 3%. Assume that the growth rate of velocity is 0%, and the rate of growth of the money supply is 4%. a. What is the current rate of inflation? b. What will happen to the inflation rate if the rate of growth of the money
In 2010, the money supply, M1, was $1,832 billion.Nominal GDP was $14,660 billion.a. What was the velocity of money measured using M1?b. In 2010, M2 was $8,816 billion. What was the velocity of money measured using M2?c. Why are these measures of velocity different? Source: Federal Reserve Bank of
During the late nineteenth century, the United States experienced a period of sustained deflation, or a falling price level. Explain using the quantity theory of money how deflation is possible. Is it necessary for the quantity of money to decline for deflation to occur?
The quantity theory of money states that changes in the money supply have predictable effects on the price level, or, in other words, that money growth determines inflation in the long run. Under what circumstances might this theory be incorrect? Briefly explain.
During the Great Depression, the price level fell during some years.a. With a falling price level, what happens to the actual real interest rate? Does your answer depend on what happens to the nominal interest rate? Briefly explain.b. In contrast, during the 2007–2009 financial crises, nominal
Do the data in Figure 6.5 on page 204 support the Fisher effect?
The long run growth rate of real GDP for the United States is about 3%, and the expected real interest rate on corporate A bonds has averaged 2.8%.a. If the growth rate of velocity is 0% and the rate of growth of the money supply is 6%, in the long run what is the nominal interest rate?b. What will
Suppose that inflation has been equal to 3% per year for several years and that the real interest rate that banks require on typical mortgage loans is 2%. a. What nominal interest rate would banks currently be charging on typical mortgages? b. The Federal Reserve unexpectedly increases the rate of
In the spring of 2011, as worries about the possibility of the Greek government defaulting on its sovereign debt rose, the nominal interest rate on Greek bonds increased sharply. a. Why did the nominal interest rate increase? b. Would you expect there to be a difference between actual and expected
Suppose that consumer preferences are changing, so that more consumers want to buy chicken and fish and fewer want to buy beef and pork.a. If inflation is low and fully anticipated, how would you expect the relative price of these goods to change, and how would that affect production of these
It is often said that inflation “greases the wheels of the labor market.” Explain what this statement means.
Suppose that the inflation rate in an economy has been 4% for several years. The central bank unexpectedly increases the rate of growth of the money supply by 2%. Describe the effect on each of the following. a. The inflation rate b. Lenders c. Borrowers d. People with fixed incomes
The idea of shoe-leather costs is that people wear out their shoes going back and forth to the bank. While this is unlikely in reality, what are some examples of actual costs that you might incur by trying to reduce the costs to you of inflation?
How can the expected inflation rate be determined?
Forty years ago, it was typical for grocery stores to post prices by labeling each individual can or box. When prices changed, an employee would have to relabel every item in the store so that the cashier could bring them up correctly. Today, most prices are posted on shelf labels and scanned into
How does hyperinflation occur?
While hyperinflations are always caused by rapid growth in the money supply, they can be intensified by the actions of households and firms trying to protect themselves from inflation by spending money as soon as they receive it. a. What is likely to happen to the velocity of money during a
If hyperinflations are caused by governments printing money, why don’t the governments of these countries simply choose to reduce the rate of the growth of the money supply? Carefully explain the consequences of such actions.
One problem with hyperinflation is that it reduces economic growth, both through resource misallocation and by reducing saving and investment.a. Why does hyperinflation cause misallocation of resources?b. Why does hyperinflation reduce saving and investment?c. What effects do the misallocation of
Hyperinflation occurred in the South during the U.S. Civil War (1861–1865). Unable to tax effectively in a largely agricultural economy, the Confederate government was forced to print money, eventually creating a money supply of approximately $1.5 billion Confederate dollars.a. Explain how the
The following table shows the approximate daily rates of inflation from some of the worst hyperinflation episodes in history:A simple way of calculating the approximate amount of time it will take prices to double is to divide 70 by the growth rate; this is called the Rule of 70. For each of the
By early 2009, Zimbabwe was experiencing inflation that was estimated to be 231 million percent per year. Because of the rapidly falling value of paper money, the government was forced to issue currency in larger and larger denominations, including a $50 billion note. At the time, a $50 billion
The graph below shows the labor market. The initial equilibrium is at point A. The new equilibrium is at point B.a. What factors could have caused the shifts shown on the graph?b. Show the new equilibrium real wage and quantity of labor on the graph. Have wages and employment increased or
How do the income and the substitution effects determine the slope of the labor supply curve?
Draw a graph of the aggregate labor market in equilibrium. Then consider each of the following scenarios. In each case, show the effect on the market and explain what will happen to the real wage and the equilibrium quantity of labor.a. A technological change occurs that increases the productivity
According to Claudia Goldin of Harvard University, in the United States prior to 1940, most married women who worked had limited education and came from lower-income families. She argues that: “Their decisions were made as secondary workers and their market work evaporated when family incomes
Suppose that workers become concerned about the future and therefore wish to increase their hours of work relative to leisure. At the same time, there is an increase in the capital stock, making workers more productive.a. Draw a graph of the labor market, showing the effect of these changes.b. Can
In countries with declining populations, governments have begun to offer income subsidies for families with children. What impact is this subsidy likely to have on the labor market, all other things being equal? Support your answer with a graph.
Discussing job openings during the recession, Cheryl Peterson, a director of the American Nurses Association, was quoted as saying: “Until the downturn, it was easy for [nurses] to find employment. Now it is a little more difficult because the number of job openings has fallen and we have more
February 2010, the average duration of unemployment increased to 30.5 weeks, a record high. According to CNN Money, “It’s no wonder unemployed workers are getting discouraged: It’s never taken longer to find a new job.” a. What type of unemployment is the quote referring to? b. What may
Compare the average duration of unemployment in the United States and Europe.
Increases in structural unemployment can result from a recession but are more commonly associated with other changes, such as the development of new products that replace old products. A classic example of this is typewriters and computers. a. How might technological change cause structural
In countries with high birthrates, such as many of the Central and South American nations, unemployment rates are typically far higher than in countries with lower birthrates. Explain why.
Demographic studies show that the Hispanic population of the United States is increasing. Traditionally, Hispanics have had higher-than-average rates of unemployment. However, it is also true that Hispanic women tend to have lower labor force participation rates (in other words, are less likely to
The following table, based on data from the Bureau of Labor Statistics, gives total nonfarm employment in October, November, and December 2010:a. Calculate the change in nonfarm employment between October and November and between November and December. b. Because new workers constantly enter the
Suppose that the rate of job separation is 2% and the job-finding rate is 18%.a. What is the natural rate of unemployment?b. If the job-finding rate doubles, what is the new natural rate of unemployment?c. Return to the original scenario. If the rate of job separation is cut in half, what is the
How would you expect each of the following factors to affect the natural rate of unemployment? a. There is an increase in the rate of technological change. b. The minimum wage falls. c. Unemployment benefits (that is, the percentage of wages replaced by unemployment) are increased. d. Improvements
The CBO estimated that the natural rate of unemployment was 6.8% in 1979 and 5.0% in 2001. If you examine Figure 7.10 on page 250 carefully, you can see that the natural rate remained relatively constant during the 1980s and then fell more rapidly during the 1990s.a. Considering only the frictional
Increases in the generosity (percentage of wages replaced) and duration of unemployment benefits are associated with increases in the natural rate of unemployment. a. Why do governments provide unemployment benefits if they may increase unemployment rates? b. Among the measures passed by the U.S.
How does a real wage above equilibrium cause unemployment?
Suppose the equations for the demand and supply of labor are given by: LD = 100 - 2w LS = 10 + 3w Where w is the real wage and LD is LS the quantity of labor demanded and supplied, respectively. a. Solve for the equilibrium wage and the quantity of employment and graph your results. b. Assume that
In 1914, Ford Motor Company doubled its wage to $5 per day, a rate that was considerably above the average wage at that time. a. In terms of efficiency wages, explain why Ford would have had an incentive to do this. b. What data would you look for to determine whether Ford’s wage increase was
Minimum wage laws are controversial for many reasons. One is that they may not be beneficial to the workers that they are most intended to help. a. What type of workers is most likely to be paid the minimum wage? b. What happens to employment of these workers when a minimum wage is enacted (or
Some craft unions, such as electricians, restrict the number of workers who can join the union and then negotiate with employers to hire only union workers. Use a demand and supply graph to illustrate the effect of a craft union on employment and wages in an industry.
Traditionally, unions have been strongest in manufacturing industries. In the United States, unionism reached its peak in 1945, and it has been falling since then. a. How does the changing sect oral composition of the U.S. economy help to explain this trend? b. Two industries in which,
Does the extent of labor unionism explain the difference between European and U.S. unemployment rates?
Discussing the recovery of the labor market in Europe, the European Central Bank (ECB) noted: “Hourly wages adjusted earlier and more sharply in the United States than in the euro area. Different labor market policies and a greater degree of wage flexibility . Played a role.”What did the ECB
In Japan, relationships between labor unions and management tend to be less adversarial and more cooperative than those in the United States and Europe. What are the implications of this observation for the size of Japan’s natural rate of unemployment, relative to the natural rates of
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